Mark Lewis: a major new report for Kepler Cheuvreux: “Until now, concern over new high-cost oil projects potentially becoming stranded in future has focused on the downside risk to oil prices, a concern that will only increase if oil prices – already down by nearly USD20/bbl since June on demand worries – fall further near term.”“However, there is another dimension to stranded-asset risk, largely ignored in this debate so far, namely the risk posed by a scenario of sustained higher oil prices over the longer term. And when looking at the risk of stranded assets it is the long term – i.e. beyond 2025 – that counts.
Despite oil prices averaging close to USD110/bbl since mid-2011, the majors have seen their capital productivity decline sharply in recent years, prompting them to announce cuts to future capex in Q1 of this year. This is a clear sign they need higher prices for their higher-cost new projects. For this and many other reasons, we think that whatever happens in the near term, sustained higher prices will ultimately be necessary to bring on the supply projected in the IEA’s base-case scenario out to 2035. But with our Energy Return on Capital Invested (EROCI) analysis suggesting that renewables are already surprisingly competitive with marginal new oil projects, and with renewables set to see further cost reductions over the next two decades, higher long-term oil prices will be no guarantee against asset-stranding beyond 2025 for marginal new projects.
The IEA sees global oil demand 14mbd higher in 2035, with c.4mbd of this for light vehicles in Asia. If the improving economics of renewables versus oil spurs a faster take-up of EVs in China than the IEA is assuming, this could threaten the viability of the marginal barrels beyond 2025. Higher long-term oil prices could thus create asset-stranding risk for new projects undertaken today at the higher end of the cost curve, a risk the majors should take seriously. Indeed, we think the oil majors now need to re-think their business model and become energy majors.”
Despite oil prices averaging close to USD110/bbl since mid-2011, the majors have seen their capital productivity decline sharply in recent years, prompting them to announce cuts to future capex in Q1 of this year. This is a clear sign they need higher prices for their higher-cost new projects. For this and many other reasons, we think that whatever happens in the near term, sustained higher prices will ultimately be necessary to bring on the supply projected in the IEA’s base-case scenario out to 2035. But with our Energy Return on Capital Invested (EROCI) analysis suggesting that renewables are already surprisingly competitive with marginal new oil projects, and with renewables set to see further cost reductions over the next two decades, higher long-term oil prices will be no guarantee against asset-stranding beyond 2025 for marginal new projects.
The IEA sees global oil demand 14mbd higher in 2035, with c.4mbd of this for light vehicles in Asia. If the improving economics of renewables versus oil spurs a faster take-up of EVs in China than the IEA is assuming, this could threaten the viability of the marginal barrels beyond 2025. Higher long-term oil prices could thus create asset-stranding risk for new projects undertaken today at the higher end of the cost curve, a risk the majors should take seriously. Indeed, we think the oil majors now need to re-think their business model and become energy majors.”
